Stimulus for the Long Run

Last night, Simon Rosenberg went onto Fox Business Channel to talk about a point we've been making at NDN for awhile: The Obama administration's plan for more stimulus is grounded in solid economics and is far more likely than a spending freeze to help the United States avoid a double-dip recession. Calls for sudden, total austerity are not only economically misguided, they misread the public mood: amid all the cable-news chatter about the deficit, it's surprising how few Americans actually list it as their primary concern in polls. The economy and joblessness remain Americans' top concern by a wide margin.

Here's Simon:

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Policymakers and pundits who finally are worried about a "jobless recovery" should consider this: Our actual prospects are worse than that term suggests. The initial expansion we may already be experiencing will be notable not for a lack of new jobs, as the phrase "jobless recovery" suggests, but for substantial, continued job losses. Total employment will continue to decline for many months and perhaps as long as two years, as it did after the 2001 recession. Nor will it be enough to aim for simply "recovery," if by that is meant a return to the conditions that preceded this recession, including unstable capital markets and stagnating real wages in the face of strong productivity gains.

The stimulus passed last February has helped to slow job losses – without it, we might well shed an additional one-to-two million more jobs. But fiscal stimulus is a much weaker lever for creating jobs than it used to be, because of changes in the relationship between increases in economic demand (that's what stimulus does) and creating new jobs to satisfy that demand. In the 2002-2007 expansion, private employment grew at less than half the rate, relative to growth, as it did in the expansions of the 1980s and 1990s. So, Washington boosting demand and growth today has less than half the impact on jobs that it once did.

In the short-run, there's little we can do about this change. Behind it lies large, structural changes, especially the emergence of more intense competition spurred by globalization, which now limits how much businesses can raise their prices when their costs increase. The good news about this development is the low inflation that’s prevailed across most of the world for nearly two decades, or basically the time frame of modern globalization. The bad news is that when health care and energy costs, for example, rise rapidly, businesses which can’t pass along those cost increases in higher prices have to cut other costs – and they often start with jobs and wages. (These developments are also big factors in why wages now stagnate even as productivity increases.)

This means that the administration’s long-term economic agenda has to include serious steps to reduce how much health care and energy prices rise, or relieve business of some of the burden of those cost increases. In short, long-term cost containment in health care and the development of alternative energy sources on a large scale both have to be part of the administration’s core economic agenda, with all of the political urgency that implies. Otherwise – and here’s a scary thought – most Americans may fare no better economically under President Obama than they did under his failed predecessor.

There are still a few cards left to play for the shorter-term. The most important jobs measure in the February stimulus was assistance to the states (and through them, to localities), so their own budget squeezes don’t force them to lay off so many teachers, police, and other public employees. Their budget constraints are still growing worse – an important part, because unemployment is still rising. The most efficient way for Congress and the President to limit additional jobs losses in 2010, then, is to provide perhaps another $100 billion in assistance to the states.

The other measure now getting attention is a tax break for businesses that create new jobs, an idea the President promoted in his campaign but which never made it into the stimulus. Here's how it works: Businesses would receive a tax credit for the first year of payroll taxes on new employees or those moving from part-time to full-time, and a credit for half as much in the second year. It's not very well targeted, since you end up subsidizing jobs that would have been created without any tax break. (Keep in mind, falling employment is a net result, with some businesses adding jobs and others cutting them.) But it is well focused on jobs, so long as we also include some conditions on those who claim it. For example, a new business should have to be in place for at least six months before qualifying, to head off scams where people close down existing firms, reopen them, and then use all their existing employees to claim a big tax benefit. And a firm’s total wage costs should have to rise, so employers don't just fire and rehire workers in order to qualify.

We tried a version of this tax break in the 1970s, and most economists who've looked at it believe it did some good. It should help again – but not as much as it did last time, because the economy's natural, job-creating dynamics are much weaker and more constrained under globalization than they were in the 1970s.

Beyond these two measures, the most important step for the administration is to set its political sights on the more difficult, long-term measures required to restore healthy and sustained job creation and wage gains – and to prepare the American people to wait a while for real results.

New figures showing a decline in wholesale prices and a drop in new-home construction highlighted how weak the economy remains, even as some optimists declare the recession to be over.

Producer prices fell more than expected in July as the costs of food and energy slipped, the Labor Department reported on Tuesday. The 0.9 percent monthly decline came after three months of increases, and suggested that demand was weak up and down the ladder of production, from consumer goods to intermediate goods like chemicals and rubber to raw materials.

Producer prices declined a record 6.8 percent from last July, when crude oil prices soared above $145 a barrel and pushed the costs of fuels, food and other products sharply higher, before they fell back amid the global financial crisis. The decline in the last 12 months is the largest drop in 60 years, since the government starting keeping such records.

Despite several glimmers of rising prices and increased activity in the housing market, the Commerce Department’s report on housing starts and building permits showed that the market for new homes remained weak with building loans tight and so many foreclosures on the market.

New-home construction fell a seasonally adjusted 1 percent in July from a month earlier, to an annual rate of 581,000, the government said, and building permits were down 1.8 percent from June. Housing completions also dropped, falling 0.9 percent for the month.

The housing piece is not particularly surprising, as that market remains weak overall. At a time when unemployment is so high and houses so diminished in value, now seems an unlikely time for people to sell their homes to move for a new job and therefore have a house built.

While the economy seems to be getting worse more slowly, it is still getting worse and remains incredibly unstable. The one element able to raise producer prices most quickly, a rise in energy prices, could be disastrous.

Tremendous excess capacity remains in the economy, and many of the pieces of the stimulus that have yet to come online, namely infrastructure spending, are needed in the coming months (despite what we may hear on conservative cable networks). These projects will be noticed and helpful, both to the economy and the politicians who made them happen.

In this morning's Washington Post, Michael A. Fletcher writes about the probability of a jobless recovery, a meme that has been growing in the zeitgeist around Washington lately.

Despite signs that the recession gripping the nation's economy may be easing, the unemployment rate is projected to continue rising for another year before topping out in double digits, a prospect that threatens to slow growth, increase poverty and further complicate the Obama administration's message of optimism about the economic outlook.

The likelihood of severe unemployment extending into the 2010 midterm elections and beyond poses a significant political hurdle to President Obama and congressional Democrats, who are already under fire for what critics label profligate spending. Continuing high unemployment rates would undercut the fundamental argument behind much of that spending: the promise that it will create new jobs and improve the prospects of working Americans, which Obama has called the ultimate measure of a healthy economy....

Since the recession took hold in December 2007, the U.S. economy has lost 5.7 million jobs, a rapid decline that caught administration and other economists off guard. In recent months, the velocity of job losses has slowed substantially, which, combined with a rising stock market and increases in consumer spending, has offered hope that a recovery is beginning to take hold.

But employers still cut 345,000 jobs last month, while the nation's growing working-age population requires the job market to expand by 125,000 to 150,000 a month just to keep the unemployment rate stable.

The dynamics of the modern economy further dim the employment picture. Job growth was weak for years after the past two recessions, in 1991 and 2001. Employers have grown increasingly slow to rehire workers, and steady advances in technology have allowed businesses to do more with fewer workers.

It's really only a matter of time until that double-digit unemployment number comes out, and there are strong arguments to be made that we are, for most intents and purposes, already there. This means it's very much worth thinking about the jobs meme that has basically taken over the economic dialogue. If a jobless recovery is a strong possibility, crafting an agenda around that meme has become far more politically dangerous. It also means that it's now worth devoting almost every waking minute to figuring out how to avoid such a scenario - or an even share of time fixing it and blaming it on the last guy, which is what FDR was able to do, and what the American people overwhelmingly believe right now.

This week, the White House release results of the "stress tests" and President Obama presented a vision for retraining the American workforce. NDN is pleased to present a number of recommended pieces on rebuilding the financial system, the American workforce, the housing market, and a number of other important items on America's economic future.

Short Sales and the Market Meltdown by Dr. Robert Shapiro, 5/7/2009 - Reflecting on a recent speaking engagement with SEC commissioners, Shapiro argues for additional regulation of short sales.

Should We Try to Save the Damaged Brands? by Simon Rosenberg, 4/30/2009 - Rosenberg asks if these mainstay, now troubled American brands - AIG, Chrysler, Citi, GM - can be saved by being propped up by the government or if their brands are permanently insolvent.

The Global Economic Crisis and Future Ambassadorial Appointments by Simon Rosenberg, 11/26/2008 - With the mammoth task of rebuilding international financial architecture and recovering from a global recession awaiting the new President, Rosenberg points out the the ambassadors to the G20 nations will be key members of the economic team.

A Stimulus for the Long Run by Simon Rosenberg and Dr. Robert Shapiro, 11/14/2008 – This important essay lays out the now widely agreed-upon argument that the upcoming economic stimulus package must include investments in the basic elements of growth for the next decade, including elements that create a low-carbon, energy-efficient economy.

Back to Basics: The Treasury Plan Won't Work by Dr. Robert Shapiro, 9/24/2008 - As the financial crisis unfolded and the Bush Administration offered its response, Shapiro argued that, while major action was needed, the Treasury's plan would be ineffective.

Keep People in Their Homes by Simon Rosenberg and Dr. Robert Shapiro, 9/23/2008 – At the beginning of the financial collapse, NDN offered this narrative-shaping essay and campaign on the economic need to stabilize the housing market.